Eric Jordahl and Anu Singh are managing directors over treasury and capital markets and mergers, acquisitions, and partnerships, respectively, at Kaufman Hall of Chicago, IL.
What are the most significant challenges hospitals will see as a result of the coronavirus pandemic and the resulting economic turmoil?
The problem is the time it takes away from more strategic and more management related tasks. The biggest challenge that executives are going to face is that the time, resources, and attention needed to deal with this will take them away from many other tasks. Prioritization of what is now strategic and what is most critical is going to have to get reshuffled. Time is a precious resource and we’re going to see it constrained even further.
I would agree with that. I focus on the treasury side of things, where it’s really all about volatility. When you get into moments like this with a lot of volatility, it’s difficult to make solid decisions. Decision-making becomes an incredible challenge because it’s difficult to understand where markets are going, what good pricing looks like, and what good execution look like. Whether it’s the asset side of a balance sheet and the investments that hospital CFOs are worrying about, or the debt side that they’re worried about, volatility creates all sorts of challenges on either side of that balance sheet and makes decisions about what to do in the moment very, very difficult.
What will be the health system margin and cash flow impact of treating large numbers of patients?
There was a phenomenon in 2008 called deflating balance sheets. As the value of equity instruments went down on balance sheets and different things happened, client balance sheets got really strained. What was interesting, though, was that was across the whole universe of providers, especially with regard to credit positions, they weren’t really impacted by that event. Where things got dicey was when that whole-industry phenomenon was paired with weaker operating performance at a particular facility. That’s where organizations in 2008 had credit and rating kinds of problems. I think it will be similar in the world today, where a lot of the industry will be hit in similar ways.
The question is, will there be some pockets, areas of the country, facilities, or different things where the impact is disproportionate for whatever set of reasons? If 2008 was any kind of indicator, it’s those kinds of more isolated pockets that are going to be more problematic.
Provider credit and uncompensated care will be a very big problem, and I think it escalates across the whole US economy. Conferences and sporting events are being cancelled. You see an economy that in some ways feels like people are saying, “Let’s just stop the economy.” The ripple consequence across everything, including healthcare providers, is going to be a challenge.
We’ll see what happens with payers and how their performance holds up. Obviously the government is heavily involved in payment around healthcare. I would expect, given that this was a healthcare crisis, that the government would be pretty actively involved in trying to create financial safety nets of some sort. But I don’t think anybody has a real clear idea right now of what that might mean.
How will non-core health system activities, such as mergers and acquisitions, proceed in the near term?
Anything that was a strategic initiative — M&A, innovation or a venture fund, acquisition of a physician practices or real estate, whatever the case may be — will continue. When you have a good strategic rationale to do something in a way that is battle tested, even an event like this that is upon us doesn’t necessarily change the strategy. What could change is the timing and the pace of those pursuits. It may take longer to complete those transactions.
Acquisitions that require third-party sources — a set of stakeholders selling a physician practice or a source of financing to help with an acquisition – will be more adversely impacted by this event, and you are looking at extended timelines. Some M&A processes may either slow down or follow a different pace. But like most things that come upon us without much warning and without much precedent or even a playbook of how to deal with this, it just slows some decisions down and adds an additional level of consideration. But if it passes strategic muster, it will probably continue.
What would be the early warning signs in a health system’s financials that current events might be causing problems?
From a treasury standpoint, going back to this thing about balance sheet deflation, a phrase that organizations sometimes use is “fortress balance sheet.” That is a is a balance sheet that is built to withstand shocks. Use of that concept is increasing. Most healthcare organizations raise external capital through external debt markets, where interest rates are falling and have fallen fairly dramatically. On the one hand, organizations think, “Oh this is great.” But on the other hand, other parts of their balance sheet are affected by financial market dislocation.
It is really understanding your total exposure and how you are positioned to manage those exposures. A lot of CFOs learned great lessons from the 2007-2008 credit crisis, and most of them are coming into this with stronger balance sheets. But that’s still a question that will emerge. One of the main questions is, how long does this last? Does it have a long tail and we get hit with waves of financial market shocks? The longer we go into this, the harder it is going to be for healthcare balance sheets to hold up. That is something that all CFOs should be looking at.